Welcome to the new Becker-Posner Blog, maintained by the University of Chicago Law School.

July 2011

07/24/2011

Job recovery in America has been disturbingly slow during the two years since the official end of the 2007-09 Great Recession. Unemployment has declined by only a single percentage point to 9.2% from its peak of 10.2% in 2009, while the percent of the adult population that is working is even lower than it was at the end of the recession. To put these figures in perspective, two years after the end of the severe recession of 1981-82, the unemployment rate was down by 3,6 percentage points from its peak of 10.8%, while the fraction working was up by 2,5 percentage points.

To be sure, while the recession of 1981-82 was the sharpest since the end of World War II prior to the Great Recession, it did not have as deep a financial crisis as the one that started in 2007. Although recoveries from financial crises are notoriously slow and erratic, the slowness of the current employment (and output) recovery is still obviously of great concern. The data on the duration of unemployment spells adds to the uneasiness. The great majority of workers can handle an unemployment spell of a few months since they can draw down savings, borrow from family members, live off a spouse’s earnings, and often qualify for unemployment compensation, Medicaid, and other government assistance programs. Unfortunately, however, many of the unemployed have been out of work for more than just a few months: over 40% have not had a regular job for at least 6 months, and almost one-third of the unemployed had not had a regular job for over a year.

Economists, political leaders, and public intellectuals have put forward various and conflicting ideas about how to improve the employment and unemployment picture. Some economists advocate further large fiscal stimulus packages in order to compensate for what is considered insufficient aggregate demand for goods and services by consumers and investors. Yet we already had close to a trillion dollar badly designed stimulus package, tax credits for first time homebuyers, a senseless “cash for clunkers” program, and other federal programs that have not had any clear sustained effect on moving the economy forward.

It is obvious now that forecasts by some economists in President Obama’s administration that these programs would reduce unemployment to under 8% were far too optimistic. Although little consensus exists on what in fact was achieved by the major $800 billion stimulus package, I do not know of convincing evidence that it accomplished a lot in reducing unemployment and raising employment. So it is hard to be optimistic that an additional stimulus package would be designed better or work any better, and of course, it would add to an already large fiscal deficit.

Other proposals to increase employment operate not by trying to stimulate aggregate demand for goods, but by directly encouraging employers to raise employment. One simple proposal is to give employers a subsidy for each worker employed, such as a subsidy equal to 10% of wages paid. This approach is simple but it would be expensive, and it would be inefficient since the vast majority of employees would have jobs without any subsidy. Even if the wage subsidy increased employment by 10 percentage points-which would be huge- 90% of the subsidy would be spent on workers who would have been employed anyway. At a 10% wage subsidy per worker, this means about 9% of the aggregate wage bill, which amounts to trillions of dollars, would simply be a transfer from taxpayers to employers. Such an expensive and inefficient program is hardly politically or economically attractive when the current political debate is over how far to cut, not increase, federal spending.

Recognizing the waste of such an overall wage subsidy, another approach subsidizes new hires only. This approach does avoid subsidizing all employment, but it fails to appreciate the magnitude of new hires even during bad times. The JOLTS data published by the federal government indicate that over 4 million persons are newly hired each month even during the current post recession period. Therefore, subsidizing new hires would pay subsidies for about 50 million new hires annually. If the subsidy per hire were $3000 (about 10% of their annual earnings), this would cost some $150 billion per year.

This is not chicken feed even for the federal government. Moreover, employers would try to game the system by laying off some workers so they can hire other workers and gain the new-hire subsidy. The result would be an increase in the number of persons becoming unemployed along with greater exits from the unemployment state. The net effect on employment would probably be positive and overall unemployment would tend to decrease, but the employment bang for the substantial bucks involved would be quite small.

Aside from the depth of the financial crisis, I believe the main source of slow hiring initially were the many anti-business proposals voiced by some members of Congress and even by the president. Many of these were discarded or tamed down, but Obamacare (the Patient Protection and Affordable Care Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act have raised the prospects of higher and less certain health care costs for businesses, and greater regulation and more uncertainty about government policy in the financial and consumer areas. Neither Act gives employers an incentive to expand their payrolls.

Adding to this is the huge uncertainty about what Democrats and Republicans can agree to on taming the large fiscal deficits, the looming entitlement crisis, and the exploding debt. No wonder that businesses are playing it close to their chests by keeping their payrolls down, and by their reluctance to commit to long-term investments.

The analysis in this post to me implies that the most effective solution to the weak recovery is not further stimulus packages, nor subsidies to employment or hiring, but an agreement between Congress and the president to cut trillions of dollars from federal spending during the next decade, and to reform the tax system toward a much broader and much flatter personal and corporate tax structure. The report of Obama’s National Commission on Fiscal Responsibility and Reform is a starting point, and Representative Ryan’s Roadmap also has excellent proposals on how to do this.

Becker is pessimistic that much can be done in the short term to stimulate employment. That is doubtless correct in a realistic sense, but I think it worth pointing out that if politics were not what they are much could probably be done and at low net cost and possibly even with net cost savings.

The simplest short-term (but also long-term) stimulant to employment would be to reduce the minimum wage, which has risen greatly in recent years. This would reduce the cost of labor to employers and hence encourage the substitution of labor for capital inputs. The minimum-wage appears to have its greatest disemployment effects among blacks and teenagers, moreover, and those are two of the groups with the highest unemployment rates.

True, the reduction of the minimum wage would reduce some incomes by increasing the supply of labor, and reduced incomes would result in reduced consumption which could in turn reduce production and therefore employment. But this effect would probably be offset by the effect of lower labor costs in stimulating production.

The Fair Labor Standards Act, which imposes the federal minimum wage, also requires that overtime wages be at least 50 percent higher than the employer’s normal hourly wage for the workers asked to work overtime. The reason for the rule (a Depression measure) is to discourage overtime and thus spread the available work among more employees. If this is the effect, it is an argument for making the overtime wage an even higher percentage of the normal wage than the current 150 percent. The counterargument is that regular pay would fall to compensate an increase in the overtime wage, so employers would not hire additional workers.

A simple way to stimulate employment would be suspension of the Davis-Bacon Act, which requires federal government contractors to pay “prevailing wages” often tied to inflated union-negotiated pay scales. And along with that, reversal of efforts by the Democratic-controlled National Labor Relations Board to enourage unionization, which by driving up wages reduces the demand for labor. Unionization also reduces the efficiency with which labor is employed by imposing the restrictions typically found in collective bargaining contracts, such as requiring that layoffs be in reverse order of seniority and limiting employers’ authority to switch workers between jobs.

Unemployment benefits, which normally last for only six months, have been progressively extended during the current depression (I do not accept the proposition that the financial crisis of 2008 merely triggered a “recession” that ended two years ago when GDP stopped falling in nominal terms) to almost two years. The longer the benefits period (and the higher the benefits), the slower are unemployed workers to obtain new employment; and the longer they are out of work the less likely they are ever to return to work, because their work skills and attitudes erode over time. With so many two-income households nowadays, the decision of one spouse to give up on looking for a market job and instead becoming a full-time household producer (“housewife” or “house husband”) becomes an attractive option.

Cuts in the size of unemployment benefits, and of other subsidy programs attractive to the unemployed, such as food stamps and Medicaid, would similarly encourage greater job search by unemployed persons.

A recent study by the economist Steve Davis, and his colleagues, finds that the vigor of job search by the unemployed is currently much lower than in previous economic downturns, though this may be due in part to realistic pessimism about the posibility of finding work.

All these measures would be costless to the government. A new stimulus (that is, deficit spending intended to stimulate the economy) would not be, but if well designed and implemented (tremendous ifs!) could be effective in increasing employment, and if so pay for itself. This is the Keynesian remedy, which has become discredited not because it is unsound but because the $800 billion-plus stimulus enacted in February 2009 was so poorly designed and implemented. (And because of the disastrous prediction by Christina Romer, the incoming chairwoman of the Council of Economic Advisers, in January 2009 that without a stimulus the unemployment rate might rise above 8 percent. It rose to 10 percent. and now is above 9 percent, with the stimulus. What made the prediction reckless, as well as politically disastrous when it turned out to be false, was that no one could predict in January 2009 what the unemployment rate would be at any date in the future.)

Much of the stimulus consisted of transfer payments to individuals, for example in the form of tax credits. Such transfers are not effective in stimulating employment. They are transitory boosts in income and a large percentage of such boosts is saved rather than spent and what is spent has only an indirect future impact on employment: a slight rise in consumer spending may have negligible effects on production if sellers have a lot of inventory, and even if they increase production they may do so by squeezing more work ouf of their existing workforce rather than by hiring additional workers.

A more intelligent part of the stimulus was the transfers to state governments. They enabled the states that were on the brink of insolvency and may therefore have had difficulty borrowing to retain a number of teachers and other public employees whom they would otherwise have had to lay off. The transfers thus forestalled an increase in unemployment.

Best of all—and the core of Keynesian depression remedies—was—in theory—the modest part of the stimulus allocated for public works, particularly roadbuilding and –repair and other construction-related projects (such as insulating houses, and painting and otherwise refurbishing public buildings). Because of the collapse of the housing market, unemployment was (and remains) very high among construction workers. If the government hires construction companies for new projects, the effect on the employment of construction workers should be positive and immediate.

But here is where failure of implementation was critical. Although American roads, bridges, and other infrastructure are in poor shape, the government proved incapable of laumching new construction projects in timely fashion. For rather than placing a tough-minded, experienced business executive in charge and telling him to cut through bureaucratic red tape (as the Administration had done successfully with regard to the government takeover of General Motors and Chrysler), the President placed the Vice President in charge of administering the stimulus. He had neither the time nor the business and managerial background required for such an assignment, or the interest or temperament

Nevertheless the stimulus doubtless had some positive effect on employment, since it did inject more than $800 billion into the economy in a short period, most of which would otherwise have remained in rather inert savings. But as with many issues in macroeconomics this one cannot be resolved with any confidence. But if government expenditures were reduced in ways that did not significantly increase unemployment, and the savings allocated to a stimulus program focused entirely on creating labor-intensive public projects promptly implemented, there would be a positive effect on employment with no net increase in government spending.

But all these are pipe dreams, because of the politics of U.S. economic policy. The government is likely to do anything to stimulate employment. Eventually the economy will recover on its own, as consumers dissave and thus increase consumption, and with the increased consumption will come increased production and hence increased employment.

07/17/2011

On August 2, even if the ceiling on federal debt is not raised the government will not yet be in default in a technical sense. It will not be able to borrow, but it has enough money coming in each month from collection of federal taxes to service its debts. Without borrowing, however, it will not have enough money to pay noncontractual obligations in full, such as government salaries, and entitlements such as social security, Medicare, and Medicaid, and a host of subsidies. No doubt before the political and economic damage becomes too severe, the Republican radicals in the House of Representatives will relent and the ceiling on borrowing will be raised. Before that happens interest rates may rise, and stay higher, because of doubts about the basic competence of American government. Those doubts, plus the higher interest rates they engender, may deepen the current economic downturn, which in turn will reduce tax collections, increase transfer payments, and in both respects increase the federal deficit.

Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner to cut federal spending over the next decade by $3 trillion and increase tax revenues (by reducing or eliminating various deductions and credits) by $1 trillion over the same period (a total reduction of the budget of $400 billion a year--roughly 10 percent) is a deep mystery. No doubt much of the proposed spending decrease and tax-revenue increase would prove to be fictitious, or at least speculative, because based on predictions. But it could put in motion a serious movement to reduce the deficit. It would show that spending was not sacrosanct or increased tax revenues anathema.

The opposition to increasing revenues seems based on concern that higher government revenues reduce pressure for reducing spending; and that is true. Yet what is happening in the states undermines that concern. The deficit states are in the approximate position that the federal government will be on after August 2 if the debt ceiling isn’t raised. The states can’t borrow their way out of insolvency, yet their response has not been just to raise taxes; it has been a combination of raising taxes and cutting spending. If the Democratic Administration agreed to increase tax revenues by one dollar for every three dollars in spending reductions, that would seem to be a good outcome from the Republican standpoint.

One problem is attributable to Obama, though it is not a fault of Obama. Obama resembles such Presidents as Nixon and Clinton in the following respect. They are what the political scientist Stephen Skowronek calls practitioners of “third way” politics (Tony Blair was another), who undermine the opposition by borrowing policies from it in an effort to seize the middle and with it to achieve political dominance. Think of Nixon’s economic policies, which were a continuation of Johnson’s “Great Society”; Clinton’s welfare reform and support of capital punishment; and Obama’s pragmatic centrism, reflected in his embrace, albeit very recent, of entitlements reform. The resemblance between Nixon and Obama is, surprising as this may seem, particularly close. Nixon was a bête noir of the Left and Obama is a bête noir of the Right, in both cases based on their activities before they became President (Nixon’s red-baiting, Obama’s community organizing). But Nixon as President was, and Obama is (or is willing to be, under political pressure), a centrist President. That infuriates the opposition by stealing its thunder, and so provokes a powerful reaction. For the Republicans to have acceded to the Obama-Bohner plan of heavy spending cuts and light tax increases would have conceded the political middle to Obama.

It’s not actually obvious that the current $14 trillion federal deficit is too large, or that the federal government is too large. The problem is that the aging of the population and the growing cost and efficacy of medical technology (technology responsible in part for the aging of the population) portends dramatic increases in federal transfer payments, which may cause the deficit to grow faster than the economy. What is important is not to reduce the deficit but to keep it from growing faster than the economy. Not that that’s easy to do. The growth of the deficit could be slowed (perhaps to zero) by a combination of lower spending, higher tax revenues, and faster economic growth. The problem with the first two measures is that they probably would reduce economic growth in the short term, by reducing people’s disposable income; so even if annual deficits fell, the total deficit as a percentage of GDP might not fall—for it is not at all clear what can be done, even aside from political obstacles, to increase the average annual GDP increase of about 3 percent. Total entitlements spending plus interest on the federal public debt account for about two-thirds of the federal budget. If this component of the budget grows by 5 percent a year (and the rest of the budget is flat) while the economy is growing by 3 percent a year, the deficit as a whole will grow faster than the economy (because 5 percent of 67 percent is 3.35 percent). Hence the urgency of entitlements reform--which cannot however be legislated by August 2.

The US faces a rather easy to manage short run fiscal crisis, and very challenging long-term fiscal and growth problems. The short-term crisis is due to the rapid growth of federal debt outstanding that will soon hit the ceiling set by Congress. I have no doubt that Congress will, and should, vote to raise the ceiling. The only major uncertainty about this is whether that will be tied to presidential and congressional actions to try to reduce the long-term fiscal crisis.

That Congress will have to raise the debt limit this summer is a no-brainer since revenues are not anywhere near large enough to cover government spending. Without a boost in the ceiling, the federal government will be unable to pay its bills, including pay to federal employees. Since both Republicans and Democrats know that, and since Republicans are likely to be blamed if the ceiling is not raised and the federal government “shuts down”, congressional Republicans cannot credibly threaten not to agree to raising the ceiling. This is true even if they do not receive major concession on government spending from President Obama and congressional Democrats. Since many House Republicans oppose voting for substantial new taxes in order to gain Democratic support for spending reductions, prospects for an agreement before the debt-ceiling deadline on spending cuts and revenue increases are not good. Therefore, the best approach at present for Democrats and Republicans is to agree to an increase in the ceiling, and then afterwards try to work on a serious plan to meet the long-term spending-taxes-growth challenge.

However, contrary to much that is written, the US is not in any long-run real danger of explicitly defaulting on the federal debt, assuming debt limits are raised. If revenue is needed to pay Medicare and Medicaid expenses, purchase military equipment, pay interest on federal debt in the hands of the public, or finance other spending, the federal government can always resort in effect to printing money. To do this the government need not actually print dollar bills, for the federal government can issue enough new debt to cover its expenses that are not met by tax revenues. This is how the federal government financed its rapid increase in spending during the past several years.

If there were not enough demand by private investors and foreign governments like China for the new federal debt, the Fed would help out, to avoid explicit federal default, by buying government debt. In this way, the government could always get additional revenue to pay its bills. Of course, this approach carries major risks because banks get reserves when the government receives the “high-powered” money supplied by the Fed as it absorbs debt. Under normal economic conditions, the banks would spend most of their new reserves by extending loans to businesses and households, and by increasing their demand for assets paying higher returns than reserves do. The banks’ spending increases the money supply in the form of additional currency, demand deposits, and other highly liquid assets. In effect, the Fed would “monetize” the debt issued by the federal government to finance the government's shortfall in tax revenue.

This growth in the money supply would increase inflation in the United States, and reduce the value of the dollar in international transactions. Inflation also reduces the real, as opposed to nominal, value of the US debt in the hands of the public. In effect, the US could avoid bankruptcy and a default on its debt by inflating away some or most of the real value of its debt. The government has the power to inflate away its debt because the debt is denominated in a currency that it controls, namely dollars, as opposed to gold or another currency.

This option to use inflation to reduce the real value of its debt is not available to states like California because the Fed will not purchase their debt. Nor is it available to countries like Greece, Portugal, and Italy because their debt is denominated in Euros. These countries cannot print Euros, nor do they have unlimited capacity to issue government debt that would be bought by the European Central Bank.

However, the impact of rapid inflation on the American economy, and America’s reputation for fiscal responsibility, could be disastrous. Moreover, the government might be forced to increase the money supply, and hence inflation, at faster and faster rates in order to finance growing federal spending. So while default on government debt is not a likely prospect, avoiding the cost of growing rates of inflation does require resolution of America’s long-term fiscal situation. This is why the looming fiscal problems are a potential crisis of the first order.

The components of a solution to this crisis are clear. One major needed reform is a significant slowdown in the long-term growth of entitlements, especially Medicare and Medicaid, because entitlement growth is the main component of the long-term spending problem. A resolution of the long-term crisis also requires tax reforms that would broaden the tax base by reducing various subsidies and exemptions from the base, but would also lower marginal tax rates on most corporations and households. A broader and much flatter tax structure would raise taxes on some families and businesses, but it would bring in more revenue while causing much less harm to the economy.

What matters for the wellbeing of future generations is the long-term growth rate of the economy. The growth of the economy also determines the real burden of the debt since it is the ratio of debt to GDP that determines whether a fiscal crisis develops. In an earlier post (see “An Economic Growth and Deficit Reduction Agenda for Congress and the President”, 11/07/10) I spelled out some steps to allow America to regain its long-term growth rate of GDP of 3% per year. I hope the country can even do better than that. These steps include radically slowing the long-term growth of federal spending on entitlements, tax reform of the kind mentioned in the previous paragraph, more open immigration, especially of skilled individuals, free trade agreements, improved K-12 school systems, and a sensible and reduced regulatory structure.

All these and other reforms are feasible, but whether they will be implemented depends on whether both Republicans and Democrats put aside some of their partisan differences over spending, taxes, immigration, trade, and other policies. The present loud squabbling in Congress and by the president does not boost one’s confidence in this happening.

07/10/2011

Illegal immigration into the United States, Western Europe, Japan, and other rich countries grew rapidly from about 1990 to the beginning of the financial crisis, and has sharply declined since then. The largest number of illegal immigrants enter the United States, especially from Mexico, but the number of Mexicans crossing the border illegally has apparently slowed to a trickle during the past several years. Some observers have attributed much of the decline from Mexico to tightened border security, stricter search laws against illegal immigrants enacted by Arizona and some other border-states, and greater enforcement against employers who use illegal immigrants. These are part of the explanation, but the main factors are economic and demographic, and some of these are likely to be permanent.

The great majority of immigrants all over the world, both legal and illegal, move for economic reasons: to find jobs that pay a lot more than they can earn in their origin countries. For example, the average illegal immigrant in the United States from Mexico appears to earn about three to four times what he would earn in Mexico. This is why virtually all the illegal (and legal) immigration is from poorer to richer countries. Immigration increases when poorer countries are hit by recessions and financial crises, and by internal conflicts that make life there dangerous and more uncertain.

Illegal immigration is especially sensitive to recessions and other causes of weak job markets in richer destination countries. Illegal immigrants are usually the first to be laid off partly because they tend to be unskilled, and unskilled employees are let go in much larger numbers than are skilled employees. In addition, illegal immigrants tend to have low seniority since they are young, and employees with lower seniority are generally fired first when bad times hit.

Laid off illegal immigrants usually do not qualify for unemployment compensation, and other safety net benefits. This is why many illegal immigrants return home after losing their jobs, even though that means they must bear the costs and risks of possible future illegal entry. It also explains why the flow of illegal immigrants to the United States has slowed to a trickle, given the sharp and sustained rise in American unemployment, especially among younger and unskilled workers.

High unemployment in the United States is presumably only temporary, although it has already persisted for several years. Other more permanent factors have also been reducing the flow of illegal immigrants from Mexico. One important long-term force is the sharp decline in birth rates in Mexico during the past 30 years. The total fertility rate- that is, the number of children born to the average women over her lifetime- has declined in Mexico from almost 7 children in 1970 to over 3 children in 1990, and to only about 2 children at present. This means that Mexican fertility is now not any higher than American fertility, even though Mexico is much poorer.

The very high fertility rates in Mexico in the 1970s and 1980s produced many young Mexicans in the 2000s. This is an important determinant of why illegal immigration from Mexico peaked during 2000-2006 since most illegal immigrants are young. They can more easily bear the hardships and risks of crossing illegally into the United States, and they can look forward to higher earnings for a longer time. Moreover, high Mexican fertility rates in say 1980 produced many Mexican workers in their twenties after the year 2000, which put downward pressure on their earnings and job prospects.

Outmigration from poorer countries like Mexico, especially of illegal immigrants, tends to fall rather sharply when job availability and incomes in their countries are improving at a good pace. This has been happening in Mexico for the past 15 years. The growth in real per capita Mexican incomes since 2000 has raised Mexico’s per capita income by about 40%. Job markets have become a little more open as well, and average years of schooling have increased significantly, so that better paying jobs are much more readily available in Mexico.

Most immigrants, especially illegal immigrants, prefer not to leave if economic prospects are reasonably good in their own countries, even if their earnings would be considerably higher in richer countries. Individuals and young families prefer to stay with their parents, siblings, and friends, and with a culture they grew up with rather than becoming strangers in countries with different cultures. This is especially true for persons who would have to migrate illegally from Mexico since they bear the physical and other risks of crossing the Mexican-US border, have difficulty returning to see their families and friends, and they can be sent back at if apprehended.

Low birth rates and hopefully also growing incomes are likely to be part of the Mexican landscape for a long time. These forces should greatly reduce the long-run flow of illegal immigrants to the US after the American economy recovers from the financial crisis, and even without stepped up apprehension of illegal immigrants. Mexicans who would like to immigrate to US could better afford to wait for visas and other permits to cross the border legally since they now have decent economic prospects while in Mexico.

I argued before on these pages that immigration, especially legal immigration, is good for a country like the US that has many opportunities for ambitious and hard-working men and women. The US should respond to the economic progress and fertility declines in Mexico, elsewhere in Latin America, and also in Asia by expanding greatly the number of legal immigrants accepted (see my monograph The Challenge of Immigration, 2011 for a proposal to sell openly the right to immigrate). Expansion of legal immigration would be good for America, and it would also further cut down the number of illegal immigrants by enabling more of them to come legally and gain the many advantages of legal status.

In 2008 there were believed to be 7.03 million unauthorized Mexican immigrants in the United States, and by 2010 that number had fallen to 6.64 million, a drop of 390,000—6.64 percent. (I am dubious that these statistics are accurate, but doubtless there has been a significant decline in illegal Mexican immigration.) There are three possible reasons for the decline: reduction in employment opportunities in the United States, as a consequence of the severe economic downturn, involving heavy unemployment, that began with the financial crisis of September 2008; increased efforts at border control and apprehension of illegal immigrants to prevent unauthorized immigration, especially from Mexico (which is believed to be the source of nearly 60 percent of all illegal immigration to the United States); and improved employment opportunities in Mexico. The first two factors are probably the most important—especially the first. Many unauthorized Mexican immigrants were employed in the construction industry, and the economic downturn caused a tremendous surge of unemployment in that industry—a layoff of something like 600,000 construction workers, in all. But the second factor has a played a role. There has been toughened border enforcement, which has pushed up smugglers’ fees, which are paid for by the unauthorized immigrants; and so an increase in those fees discourages immigration.

I attach less weight to the third factor—Mexico’s improved economic situation—because the improvement of the Mexican economy has been a gradual process, beginning in the 1990s. Mexico’s per capita GDP is still a third lower than that of the United States. Approximately 18 percent of Mexicans live in extreme povery, and another 47 percent in less extreme poverty, so that a total of 65 percent of the Mexican population is poor. And Mexico has a total population of 113 million. So there is an enormous pool of potential immigrants to the United States, where wages are much higher than in Mexico.

The growing hostility to Mexican immigrants (and to immigrants in general) is understandable, though ill informed. It mainly results from the belief that immigrants “take away” jobs from Americans; a more precise formulation would be that an increase in the supply of labor, if more than proportionte to an increase in demand, will push down wages; and American workers who refuse to accept a reduction in their wages will lose their jobs to immigrants. In addition, immigrants place pressure on U.S. public services, such as public schools and emergency rooms, though unlawful immigrants are not entitled to Medicare or social security, or to many other public benefits.

Unemployment in the United States is very high, and rising, but it is doubtful that restricting immigration would have a positive effect. Immigrant workers spend much of their income in the United States (some of it, however, they remit to relatives in their country of origin), and so increase demand for goods and services, and indirectly employment; and by reducing wage levels they reduce the cost of goods and services, a reduction that also stimulates consumption and hence production and employment, although the net effect on the economy must be small—there are not that many illegal Mexican immigrants. Weakness in consumption is a major factor in the nation’s current economic weakness, however, and there is no good reason to weaken it further by expelling or preventing entry of worker-consumers. And efforts to curtail illegal immigration are costly, without doing much for employment. Probably, therefore, restricting immigration is not a sensible policy from the standpoint of stimulating the U.S. economy. A better policy would be to increase the lawful Mexican immigration quota, since lawful immigrants are likely to be more productive workers with better educational backgrounds and to place less strain on U.S. public services.

07/03/2011

It’s become a cliché that the United States has long had a shortgage of primary-care physicians (general internists, pediatricians, family physicians, general practitioners) and that this is a factor in the disarray and expense of our health care system. Yet the very idea of a protracted shortage is an anomaly in a capitalist society. A temporary imbalance of demand and supply can produce a shortage, but the shortage should not persist: price will rise to ration the existing supply, and this will both dampen demand and stimulate supply, and the combination will erase the shortage.

And this would be true of primary-care physicians in an unregulated market for health care. If there were a shortage of such physicians, their fees would rise, and this would reduce the demand for their services; at the same time, their incomes would be higher because of the higher fees, and this would induce more medical students to become primary-care physicians. So the shortage would end.

There was bound to be a relative decline in primary-care physicians because advances in medical technology increased the value of specialized medicine and so the demand for specialists (surgeons, radiologists, oncologists, cardiologists, urologists, gastroenterologists, neurologists, etc.) relative to primary-care physicians, who are generalists. But those very advances, by increasing the number of possible treatments and and also increasing, in part through better treatments, longevity, increased the demand for primary-care physicians, who “specialize” in diagnosing and treating common ailments, which are the most frequent and become more common as people age. (So primary-care physicians are both substitutes for, and complements to, specialized physicians.)

Yet instead there seems to be (though reliable statistics are hard to come by) a persisting shortage, now of long standing, of such physicians. A symptom of a shortage is queuing—it indicates that the market price is not clearing the market. There is a great deal of “involuntary” queuing in primary-care medicine, in the form of long unwanted delays in getting an appointment with a primary-care physician and refusals of these physicians to take on new patients. Of course if there is no felt urgency about seeing a doctor, there is no reason not to make appointments well in advance. But apparently difficulty in being able to be seen promptly by a primary-care physician drives many patients to hospital emergency rooms, which are very expensive.

While the fees charged by primary-care physicians have increased, their income, as well as prestige, relative to specialists has declined (even after adjustment for the fact that the specialists have to undergo longer residencies before they begiin earning real money). As a result, medical students are increasingly attracted to specialties, especially ones such as dermatology, ophthalmology, and urology, which allow for a more comfortable life style because they do not involve frequent medical emergencies. The attraction of specialization is particularly great for male medical students, who tend to have higher earnings goals and a greater desire for prestige than women, so women are becoming an increasing percentage of family-care physicians—and many of them work part time because they want to have children, and time to spend with their children. This reduces the supply of primary medical care.

The concern with the decline of primary-care medicine has become acute because of the recently enacted health care reform law. By a combination of requiring persons who do not have health insurance to buy it if they can afford to, subsidizing health insurance for people who can’t afford it, and expanding Medicaid eligibility (public health insurance for the poor), the reform is expected within a few years to increase the number of people who have public or private health insurance by more than 30 million, roughly a 20 percent increase in the number of insured. At the same time, a higher proportion of the population will be elderly. So the demand for health care will increase very substantially. Most of that increase could in principle be accommodated by expanding the number of primary-care physicians, especially because a large fraction (no one knows how large) of the currently uninsured population are young and healthy. Young and healthy people get sick, but mostly with ailments that do not require the care of specialists. What young and healthy people mainly need is diagnosis of conditions such as high blood pressure and obesity that are health time bombs, and preventive care and counseling, and both the diagnosis and the care and counseling are services that primary-care physicians provide. The need of children of poor families, and their parents, for pediatric counseling, and of the children themselves for pediatric care, is acute; and most pediatricians are primary-care physicians. Moreover, the extensive follow-up care that people with serious diseases often require can usually be provided by primary-care physicians.

The health care reform legislation recognizes that the shortage of primary-care physicians will get worse, and that this will reduce the quality and increase the cost of medical care generally, but it doesn’t do much about it. The main thing it does is increase Medicare reimbursement for primary-physician care by 10 percent. The rest (so far as I can judge from the immensely complex legislation and its as yet incomplete regulatory implementation) is subsidizing gimmicks, such as the “medical home,” which is a euphemism for delegating some of the primary care now provided by doctors to nurses.

The underlying causes of the shortage of primary-care physicians are licensure and third-party payment. I do not think it is a mistake to require that physicians be licensed, rather than allowing anyone to provide medical care, as we allow anyone to dig ditches, wait on tables, or for that matter start a new online business. Patients are in a poor position to evaluate the quality of medical care, and without licensure of physicians would doubtless be highly vulnerable to quacks. But licensure inevitably reduces supply. Primary-care physicians have to spend four years in medical school and then three years as a resident paid little more than a subsistence wage. The number of medical schools is limited, as is the number of residency programs; it has been argued (whether rightly or wrongly I don’t know) that specialists control the approval process for residency programs and use that control to throttle the expansion of primary-care medicine by limiting the number of new residency programs in primary-care medicine. Many U.S. physicians are foreigners trained abroad, which is fine, but we make them jump through loops to be licensed to practice medicine in the United States; the hoops may be justified to ensure that foreign-trained physicians are competent, but make it difficult to make up a physician shortage by recruiting foreign-trainmed physicians.

Third-party payment is a pervasive feature of American medicine. Why anyone should want health insurance other than “major medical”—that is, insurance against catastrophic medical bills—is a great mystery, as is the fact that Medicare subsidizes routiine health care of upper-middle-class people. Since disease and injury tend to be unpredictable, health insurance smooths costs over time, which is efficient, but a person could achieve that smoothing simply by saving the money that he now pays in health-insurance premiums and investing it to create a fund out of which to pay future health expenses as they occur.

But we are stuck with third-party payment, and it systematically favors specialists over primary-care physicians, because specialists tend to provide discrete procedures, which are easier for the insurers, whether they are private insurance companies or government, to cost. The care provided by primary-care physicians has, to an extent, an elastic and discretionary quality. If a hypochondriac constantly pesters his primary-care physician with imaginary symptoms, how much of the physician’s time dealing with the pest should be compensated by insurance and at what rate? How long should an annual physical exam take? How much time should the physician spend urging his patients to give up smoking? Wear car seatbelts? Avoid fast foods?

I wish I had some answers, but I don’t, given the fundamental structure of the American health care system, which is unlikely to change in the foreseeable future. If the shortage of primary-care physicians persists, queues will lengthen, and perhaps care will be rationed in other ways as well.

Until the early part of the twentieth century, practically all physicians in the United States and elsewhere were primary care physicians, not specialists. This changed dramatically in all developed countries over the remainder of that century, so that at present, over 75% of all American doctors specialize in fields like surgery, cardiology, dermatology, urology, and oncology. Specialization in Europe also grew over time, but at a much slower rate than in the United States, the result being that European medicine is practiced with relatively fewer specialists compared to generalists.

The growth in medical specialists over time is largely explained by the general economic theory of specialization and the division of labor. Medical specialization becomes more attractive when spending on medical care increases since a bigger market for medical care provides even highly specialized physicians a large enough market for their services. This conclusion is an application of Adam Smith’s famous dictum in the Wealth of Nations that the division of labor is influenced by the extent of the market. Since medical spending per person and in the aggregate is much higher in the United States than other countries, it is no surprise that American specialization is much greater than elsewhere.

The great advances in medical knowledge, especially since the 1950s, also contributed to the growth in specialization. For it takes expensive and very time-consuming investments by young doctors as medical residents and in other ways to gain command of the extensive information needed to practice modern surgery, oncology, cardiology, and other specialties. Specialization also increases when the ability to coordinate different specialists and generalists improves. That has been happening in the medical field with the growth of online records that transfers information among different specialists and generalists who are caring for the same patients, and especially with the development of group practices and medical centers that enable patients to visit different specialists and generalists in the same suite of offices or in nearby buildings.

Levels of compensation, as determined by the forces of supply and demand filtered through government policies and private insurance companies, also determine the degree and types of specialization. For medical students respond to the financial returns and other conditions found in different specialties and in general medical practice. In one important respect at least, as Posner indicates, the health care changes enacted into law by Obama will increase the demand for primary care physicians by providing subsidized medical insurance for over 30 million generally younger persons who have been without medical insurance. Young people primarily use medical care to treat the flu and other respiratory diseases, to receive general medical checkups, to treat the effects of accidents, and to get help on other medical problems that mainly involve visits, at least initially, to primary care physicians. However, the further growth over time in spending on the elderly through Medicare and private insurance will primarily increase the demand for cardiologists, oncologists, surgeons, and specialists in geriatric medicine.

Is there a “shortage” of primary care physicians relative to “shortages” of specialists? I am doubtful for several reasons. Many specialists also engage in general medical practice, especially among patients who initially come to them for specialized treatment, but who then receive medical care for medical problems that are the main business of general practitioners. This ability of specialists to also practice general medicine enables specialists to fill out their working days, and also tends to prevent any excess demand for primary care physicians from getting too large relative to the demand for specialists.

If this conclusion is correct, waiting times to get appointments for visits to general practitioners should not be significantly longer than the waiting times to get appointments to specialists. A 2009 survey by Merritt Hawkins, a healthcare consulting company, estimates willingness to take Medicaid patients and also waiting times in 15 metropolitan areas for cardiologists, dermatologists, orthopedic surgeons, obstetricians/gynecologists, and family practitioners. Willingness of general practitioners to take Medicaid patients is not lower than that of these specialists, with the exception of cardiologists.

While waiting times vary greatly among these areas, they are not systematically longer for family medicine than for the specialties surveyed. Waiting times are much longer for the Boston area than in any other area perhaps because of the vast expansion in health coverage in Massachusetts during the past decade. The wait times averaged over all the metropolitan areas vary by category of medical practice, from 16 days in cardiology to 28 days in obstetrics/gynecology. Family practice is in the middle at about 20 days. There appears to be a tendency for the categories with generally more urgent needs, like cardiology, to have the shortest waits, and those with the least urgent needs, like dermatology and obstetrics, to have the longest waits.

Much more evidence is needed on both wait times and salaries to reach definitive conclusions about shortages in different medical markets. However, these waiting time data suggest that substitution on the part of patients between family practitioners and specialists who can offer similar services, and arbitrage among medical students in deciding which fields to enter, prevents the development of particularly large “shortage” of general practice physicians.